Why People Never Plan to Fail, But Simply Fail to Plan Their Finances

I recently opened my Facebook and was saddened to discover that one of my classmates from “not too long ago ;-),” in grade grade school developed a very rare but deadly type of cancer. I admired his spirit as friends and family unite to raise funds through pledges on Facebook to help pay for his treatments as he struggles to fight for his life.

This was not the first time I’ve seen distant friends and relatives try to raise funds on Facebook either for someone’s disability, hospitalization or even death. In fact, this type of fund raising has become more and more rampant, which may someday come to a point where people may become less compassionate as they get hit up left and right for this kind of assistance (aka donor’s fatigue). With tough times and when money is tight, I’d hate to see the day when people would say “it’s every man/woman for himself/herself.”

Sad as this reality may be, we are ultimately accountable for our own financial well being. Although developing a life threatening illness or even death may be beyond our control, we can PLAN to make sure we control what happens to us and our family when the unexpected hits. It’s bad enough that our family and friends are grieving as we struggle to survive at times of adversity, let alone having them worry about the financial repercussions of such an event.

What’s even worse is what happens if we do survive such illness or disability. What is life after a catastrophic event now that you have depleted all your assets? Will your earning power ever be back to 100%, thereby keeping that roof over your head and food on the table, yet maintaining your lifestyle? Will the kids have enough for college? Will you be able to pay off all the debts you accumulated during your disability? Will retirement be out of the questions? Is Facebook the best way to plan for this?

Let me outline some solutions to make sure you are never caught with your pants down when these unforeseen events come knocking down your door.

Building a sound financial plan for your family is like building a house. First you need to establish a strong foundation. A sound financial plan’s foundation will consist of two things… PROTECTION and CASH RESERVES.

First is PROTECTION. My Mom always used to say “health is wealth.” Your ability to create wealth will rely on your wellbeing as a person. Take this away and you have nothing.

There are a few unforeseen events in our lives which we have absolutely no control over. These catastrophic events have been known to wipe out entire fortunes people have built all their lives. Unless you can say with absolute certainty that it cannot happen to you, protecting against freak accidents, fire, life threatening diseases, long term disability, death, etc.; should be everyone’s priority in life. There are a two ways you may protect yourself against these unforeseen events as follow:

Self Insure – If you are confident you have adequate funds to handle a huge hospital bill or feed your family and put your kids through college without working due to long term disability, then by all means, put that money aside somewhere safe so you can access it should the time come.

Transfer the Risk – If you believe this risk is real and you are not willing to take that risk, then Insurance companies are more than happy to take on that risk for you, in exchange for what they call a premium. Talk to an ethical, trustworthy and competent financial advisor to point you toward the right insurance product for you. Meanwhile, let’s go over the different kinds of insurance products you should be looking for as follow:

Medical Insurance – To put this into proper perspective, let’s look at how much a couple of the most common diseases will cost to treat today. For example, heart disease is one of the most common causes of hospitalization and death among Filipinos. Today, it costs between P200,000 – P1.5M to treat heart disease. Breast cancer costs over P2M. Also consider that according to my estimation, these costs inflate by almost 8% each year. This means that if it will cost you at least P4M to treat breast cancer 10 years from now.

Disability Insurance – The truth is that during the course of your career, you are three and a half times more likely to be injured and need disability coverage than you are to die and need life insurance. My friend, who we shall call John Pusongmamon, survived a massive heart attack when he was 48, at the peak of his earning power. Unfortunately, the whole left side of his body no longer had good function, thereby limiting his ability to earn. Can you withstand such a devastating event in your financial life? If you set up your cash reserve position (which we will discuss next) properly, you should be able to survive a short term (3-6 months) disability. Therefore, you should look for coverage over 6 months in case of long term disability. It probably won’t replace 100% of what you were making, but it’s better than nothing.

Life Insurance – Ask yourself… if the breadwinner of the family were to die today, how much will the surviving spouse and kids need to live on every year? Will there be enough funds for college? Will there be debts to pay? Will the surviving spouse be able to work? How will inflation affect all their daily needs? Add all this up, and that will probably be the amount of life insurance coverage you will need. Just beware of insurance agents who try to sell you “expensive” policies because it pays the best commission. I will go over this in my future article on “Finding the Right Financial Consultant for You.”

Other Insurance – I will not go over much on auto insurance, homeowner’s insurance and other insurance policies. But make sure you have those types of protection as well.

Joel Barretto, CFP sold his financial planning practice in Irvine, California U.S.A. to promote financial literacy and awareness in the Philippines. He is a respected Certified Financial Planner practitioner with over 24 years of experience in helping people optimize, manage and protect their wealth.

He is a public speaker and lecturer on a variety of financial planning issues and strategies. With a passion for entrepreneurship, Joel dabbles in venture capital projects and mentors up and coming entrepreneurs on growing their start-up companies. He is a 2nd degree black belt in the martial art of Kempo and enjoys performing and directing stage musicals for community fund raisers.

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